'Republic of Samsung' Confronts a Backlash

By Don Lee

Sept. 25, 2005 12 AM PT

Times Staff Writer

SEOUL —

Cho Sung Yoon and his wife live on the 27th floor of a Samsung apartment complex here.

They cook their food on a Samsung electric range. They call each other on Samsung cellphones and check their e-mail on a Samsung home computer.

Recently, they used their Samsung credit card to get a 30% discount at a water park at Samsung Everland, South Korea’s largest amusement park. If the couple had a serious mishap there, they would have been covered.

Their insurance company? Who else: Samsung.

Samsung is now one of the world’s most recognized brands of electronic goods, and South Koreans regard it as a source of national pride. “There should be more companies like it,” says 44-year-old Cho, who works at a marketing business.

But Samsung is so pervasive and its influence so immense in South Korean society that many here say it has turned the nation into a giant company town. They call it the Republic of Samsung.

“They’re too big,” Cho’s wife complains.

Like America’s Rockefellers, Morgans and Vanderbilts of a century ago, the family that controls Samsung is contending with a populace increasingly wary of the corporation’s vast wealth and power. Many South Koreans are troubled by what they view as Samsung’s corporate arrogance and tentacle-like reach in society.

With the biggest life insurance, brokerage and credit card operations in the nation, Samsung has personal data on millions of South Koreans, which makes some citizens nervous. Small businesses complain that, like Wal-Mart, Samsung demands too much from contractors who make goods to sell under the firm’s name.

Samsung Group’s reclusive chairman, 58-year-old Lee Kun Hee, South Korea’s richest man, with an estimated fortune of $4 billion, has come under fire, accused of running the corporation like a feudal lord. Civic groups comprising scores of lawyers, professors and accountants have mobilized and filed lawsuits to push Samsung to operate more transparently and give minority shareholders a greater say in the company’s affairs.

Government officials called for an investigation of Samsung’s campaign activities after revelations in July that company representatives paid more than $10 million in bribes to candidates in South Korea’s 1997 presidential elections.

The scandal led to the resignation of South Korea’s ambassador to the United States, Hong Seok Hyun, Lee’s brother-in-law and a former newspaper publisher who is said to have delivered bags of cash personally to at least one candidate.

“Samsung’s growth is out of control,” says Kim Sang Jo, a Hansung University professor turned anti-Samsung activist. “It’s not only concentration of economic power but political and social power. That can deteriorate democracy of Korean society.”

Says Kim Jae Hong, a member of the National Assembly: “This will be a great lesson not only for Samsung but for all conglomerates not to commit such acts again.”

Samsung has apologized to the public for causing “social confusion” but has not admitted wrongdoing. Its spokespersons declined requests to interview Lee and other senior company executives.

Samsung officials point to independent surveys suggesting that South Korean public opinion supports them. And so far, they say, it hasn’t hurt Samsung sales.

Many South Koreans doubt that Samsung will be cowed by the scandal. “They won’t become weaker or suffer from this,” says Jhang Ho Gyu, 27, a graduate student in Seoul. “Samsung lawyers will prevent and block any possible attack.”

South Korea’s economy has long been dominated by family-owned conglomerates. These companies, called chaebol, played a powerful role in lifting South Korea out of poverty and turning it into the world’s 11th-largest economy. Analysts estimate that Samsung, Hyundai Group, LG Group and other chaebol account for the bulk of South Korea’s exports and tax revenue.

Samsung is the biggest of them all. With 61 affiliate companies, whose operations include aircraft engines, hospitals, hotels and textiles, Samsung makes up an estimated 15% of South Korea’s economic activity, analysts say. Its products account for one-fifth of the nation’s exports. Samsung says one-fifth of its $122 billion in revenue last year came from sales in North America.

In many parts of Seoul, the nation’s capital, it’s hard to pass a street without feeling Samsung’s presence. There are 227 apartment complexes in Seoul and other cities with “Samsung” emblazoned on them. Signs bearing Samsung’s blue-and-white logo jut out from countless storefronts selling Samsung digital products, stocks and security services. Samsung employs 135,000 people in South Korea, one of the largest workforces in the nation.

Thousands of people are treated at Samsung’s four hospitals. Many more stay at its hotels and pay for tickets to see Samsung’s pro baseball team, the Lions, or movies at dozens of theaters affiliated with Samsung. One of every two South Koreans carries a Samsung mobile phone. Many say Samsung products do well in its home market because of edgy designs, strong marketing and service.

Lee Nam Jong, who sells insurance for a living, says that when she reported a problem with a Samsung phone, company technicians came three times to check on it. But the 42-year-old doesn’t care for the way Samsung does business.

“Our prices and terms are better,” she says of her company, Shin Han Life Insurance. Still, she says, Shin Han can’t compete because of Samsung’s size and resources.

Small firms in South Korea have been unhappy about chaebol for decades. When former President Park Chung Hee took power in 1961, he used chaebol to carry out his economic development plans. One of the first people he tapped was Lee Byung Chull, the son of a wealthy landowner, who started Samsung as a trading company in 1938.

Park got chaebol to build South Korea’s bridges, highways and ships. And chaebol got access to government contracts and easy credit. South Korea’s economic miracle was born.

But when the 1997-98 Asian financial crisis crushed South Korea’s economy, many analysts blamed the chaebol system. Politicians launched an array of measures to abolish backroom dealings and cronyism by chaebol and create a Western-style, market-oriented system. New rules made money harder to secure and forced chaebol to improve transparency and corporate accountability.

At the onset of the financial crisis, Samsung was South Korea’s No. 2 chaebol behind Hyundai, the car and shipbuilding giant. Samsung was reeling from a failed bid to build a car-making business. Lee Kun Hee, who took over Samsung Group in 1987 after his father died, began to shake things up. He laid off tens of thousands of workers and imposed other brutal cuts.

Office workers recalled bringing their own coffee mugs to save on the cost of paper cups. The change in culture coincided with a sharper focus on Samsung’s core products -- semiconductors, liquid crystal displays and mobile phones. Samsung Group currently has about 2,500 PhDs on its payroll.

Last year, Samsung Electronics posted a profit of about $10 billion, accounting for two-thirds of Samsung Group’s net income. This year, Samsung’s brand overtook rival Sony in leading consumer surveys.

“You have to give them [Samsung] credit where it’s due,” says Chang Ha Joon, a professor of economics and politics at Cambridge University. Samsung also had something the other conglomerates lacked: a shrewdly built political machine. Analysts say Samsung systematically recruited influential people, lobbied judges and prosecutors, and handed out money to politicians.

In August, a civic activist group disclosed the names of scores of prominent South Koreans formerly or currently on Samsung Group’s payroll, including past prime ministers, a former finance minister and senior officials in key tax, audit and other financial regulatory agencies.

Politicians and professors alike say that has helped Samsung wield enormous sway over the country’s leading institutions, including courts, universities and even the Blue House, the official residence of the South Korean president. In May, President Roh Moo-hyun pardoned Samsung Vice Chairman Lee Hak Soo, after he was convicted on charges that he made $38 million in illegal political contributions in the 2002 presidential election campaign.

“The law stops at the gate of Samsung headquarters,” says Choi Jang Jip, a professor of politics and international relations at Korea University in Seoul.

Sun Mi Ra, a spokeswoman for the president, denies that Samsung or any other company has undue influence over the Blue House.

Sun says Roh’s decision to pardon Lee, as well as other chaebol executives in the last year, was made because their actions were part of a “bygone era” and for the sake of supporting the national economy.

“It’s to facilitate business activities,” Sun says.

Activist groups, such as the People’s Solidarity for Participatory Democracy, don’t buy that. They also contend that judges and financial regulators have been powerless to stop Samsung from skirting South Korea’s new corporate governance rules .

Samsung Electronics’ foreign shareholders express similar frustration. “The family is not the majority ownership but has disproportionate sway over what the company does,” says Devan Kaloo, head of global emerging markets for London-based Aberdeen Asset Management, which owns $770 million in Samsung stock.

Yet for all the criticism, Samsung workers remain loyal to their company, and many others want to join Samsung. A Samsung business card means you’re part of an elite social and economic class. At Samsung Electronics, the average pay is about $70,000 -- more than triple South Korea’s per capita income.

Even before the bribery scandal broke, Samsung Chairman Lee was becoming concerned about anti-Samsung sentiments. In May, company insiders say, Lee called Samsung affiliate heads to a meeting to talk about how to create a better image and contain any backlash against the company.

A year earlier, Samsung’s leaders had visited Sweden to study the Wallenbergs, the super-rich family that controls a substantial part of that nation’s economy.

Lee hasn’t given an interview in 10 years, but in his writings he has stressed the importance of social responsibility, comparing corporate arrogance to the ills that destroyed the Roman Empire.

“The minute one thinks a business can be run by himself or herself, negligence and corruption sprout,” he wrote. “And then, the firm will no longer have a tomorrow.”

(BEGIN TEXT OF INFOBOX)

A Diverse empire

Samsung has operations in more than 50 countries. Here are some of its subsidiaries.

Chemicals

Samsung Fine Chemicals

Samsung General Chemicals

Samsung Petrochemical

Electronics

Samsung Corning (TV picture-tube glass)

Samsung Electro-Mechanics (Electronic components)

Samsung Electronics (Semiconductors, consumer electronics)

Samsung SDI (Display screens, batteries)